Behrouz Ferdows, outstanding and leading entrepreneur, investor and advisor, Karlsruhe Germany civil engineering graduate, who has been working proactively internationally, has given a speech on ESG and creating values in organizations. Behrouz Ferdows stated that although many people think ESG brings to mind environmental issues like resource scarcity and climate change, it means much more which covers a range of social issues from a company’s labor practices, talent management, product safety and data security to governance matters like board diversity, executive pay and business ethics. Behrouz Ferdows stressed that ESG issues have been regarded as essential tools for financial performance by asset owners and managers and even chief executives while it has been found that only 38% of board members consider ESG to be financially effective on a company which is still an issue to be taken care of. According to authorities many boards lack enough ESG-related expertise and attention to consider material sustainability issues. In addition, the identification of concrete links between ESG and financial performance will escalate the uptake of ESG criteria as a principal driver in investment strategies, and their influence on corporate decision-making. Studies conducted by University of Oxford and Arabesque Asset Management depicted 200 reports on the relationship between ESG and financial performance showing a positive correlation between them. In 88% of reviewed sources, better operational performance was shown among companies with robust sustainability practices. The results show that strategic ESG management eventually translated into more cash flow. It also revealed that in 80% of studies, prudent sustainability practices led to positive impacts on investment performance.
Why should ESG be considered essential for organizations sustainability?
Behrouz Ferdows reiterated that the fact that better management of environmental and social factors can generate new opportunities is of utmost importance and minimization of ESG risk and cost cuts for instance have been looked upon as outcomes of these opportunities. He further stated that it is apparent that sustainable investing has resulted in the appeal of ethical funds to shareholders. Furthermore, environmentally and socially responsible companies are believed to be attracted by consumers who want to make sustainable choices making an immediate contribution to the bottom line.
ESG in the Value Chain
Behrouz Ferdows reiterated that stronger relationship with suppliers in the value chain is the result of leaders effective governance leading to reliable provision, increased efficiency and attractive credit terms. To dig deeper, environmental policies could protect natural resources, safeguarding raw materials feeding into the supply chain. Production facilities relocations will result in reductions in pollution as well as transport costs guaranteeing resource supply cuts exposing to volatility in the markets thus promoting long-term corporate profitability.
Behrouz Ferdows elaborated the ESG impacts on Staffing
Staffing is another area where ESG can have a financial impact. A satisfied workforce is ensured by fair pay, employee perks, receptive management and clear corporate purpose all lead to greater productivity, and the attraction and retention of talent thus reductions the associated costs with turnover. It has been found out that a 5% increase in employee’s commitment to their employer lead to a 3% increase in revenue the following year.
Behrouz Ferdows restated that regulators are other sources playing a role linking ESG and financial performance. ESG disclosures have become government-mandated around the world companies demonstrating a strong ESG position will be considered the most robust. Avoiding the fines and reputation risks associated with unregulated markets ensures these organizations sustainability. By the avoidance of litigation related to ESG court cases, both risk and cost will be mitigated as well.
ESG and Boards
Behrouz Ferdows continued that it is argued that boards remain stubborn when it comes to ESG and that is mainly due to the lack of expertise. The growing importance of material ESG issues in creating financial risk and opportunity is in stark contrast with the desolate picture of board director ESG expertise. It is evident that companies exhibiting good performance on material ESG driven by operational efficiencies, innovation, improved employee relations and risk mitigation have outperformed companies disregarding the issues. Tied to reputation, a significant portion of a company’s value and management of ESG issues can affect public perceptions of an organization be it a positive or negative effect. Clearly, most boards remain unprepared for the emergence of material ESG factors.
Leaders Function to Implement ESG-related Issues
Behrouz Ferdows stressed that unlike decades ago when ESG issues were not identified financially significant now it is the leader’s role that becomes for significant in terms of recruiting ESG-savvy board members who understand the risks and opportunities of material ESG issues, particularly those with lived experience ones with a strategic understanding of material ESG issues. He added that leaders must make sure that they consider the perspective of critical stakeholders like workers, civil society and long-term investors on those issues ensuring ESG is built into the culture and business strategy of the company, in terms of risks and opportunities. Another factor to be considered important is thinking sustainably. All members of the organizations, investors, the public, and any supporter of long-term strong financial performance have to reconsider that they are implementing sustainability strategies since the world is increasingly suffering from ESG-related crises.
ESG-related Issues and Propositions
Behrouz Ferdows stated further that there will be different outcomes where the objectives for employing ESG criteria differ. In the long run or over a short period of time, various elements of ESG criteria will have a significant or subtle impact on financial performance. Behrouz Ferdows added that motivation, industry and geography are the main factors making a considerable distinction between companies at large. In other words, ESG factors provide valuable insights into possible current and future environmental and social risks and opportunities for corporate entities and at the same time the entities will impact or depend on environment and society. A strong ESG proposition links to creating value in essential ways. These values can be regarded as strong or weak values. For instance, a strong ESG proposition for top-line growth is attracting B2B and B2C customers with more sustainable products and achieving better access to resources through stronger community and government relations whereas a weak ESG proposition for top-line growth is losing customers through poor sustainability practices like human rights, supply chain or a perception of unsustainable/unsafe products as well as losing access to resources including from operational shutdowns as a result of poor community and labor relations. Behrouz Ferdows concluded that ESG-related practices will not only bring about revenue but they help maintain a better world where every individual has a share to contribute.